Friday, December 2, 2011

In his latest letter to LPs, Kyle Bass of Hayman Capital Management, offers his tell-tale clarity on what may lie ahead for Europe and Japan. With his over-arching thesis of debt saturation becoming more plain to see around every corner, Bass bundles the simple (and somewhat unarguable) facts of quantitative analysis with a qualitative perspective on the cruel self-deception that we all see and read every day about Europe.

Whether it is Kahneman's "availability heuristic" (wherein participants assess the probability of an event based on whether relevant examples are cognitively "available"), the Pavlovian pro-cyclicality of thought, or the extraordinary delusions of groupthink, investors in today's sovereign debt markets can't seem to envision the consequences of a default.

His Japanese scenario is no less convicted, as we have discussed a number of times, with the accelerant of this debt-bomb being the very-same European debacle and his time-frame for this is set to begin in the next few months.

Rogers says he does not pay too much attention to the rating agencies upgrades and downgrades as their track record has left him with very little confidence. Markets may rally on certain short-term fixes or good news, but until some resolution comes to the mountainous sovereign debt, no rally will last.

He also commented that QE3 is already underway if you look at the huge jump up of M2 money supply since August (see chart below). In Rogers words, “they are buying something.” He also thinks the world could be better off without the central banks money printing press.

Regarding his current investing strategy, he said he’s shorting European stocks, American technology stocks (He is shorting a package of U.S. technology stocks including Microsoft calls), emerging market stocks, but long commodities and currencies (Rogers owns some euros).

Gerald Celente - Brian Sussman - KSFO morning Show 30 November 2011 : got effed and they are going to Eff you says Gerald Celente , you thin you are going to get all your money out of these banks before they get bust ? Gerald Celente reveals that one of his top trends for 2012 is that there is going to be some form of economic martial law that's going to be imposed upon this country.

It is clear that the Sovereign Debt Crisis in Europe is becoming really serious in order to warrant such a public show of trying to flood the system with money. All our political sources in Germany have confirmed that if it is a choice between the failure of the Euro and inflation, there will be no question that the latter will prevail. Today’s actions confirm that information.

Even the Central Bank of Canada will reduce the cost of emergency borrowing of U.S. dollars. The People’s Bank of China also announced that it would cut reserve requirements for banks. This is a global effort to reduce the cost of money and inflate the world economy out of crisis that is devaluating money causing even tangible assets to rise (including shares). Again, instead of Europe reforming the ECB to function like the Fed with an elastic money supply, once again they have to drag the entire world into the operation. While some see this as a positive development that was designed to address the inability of the ECB interbank funding pressures to accommodate European banks, still this is by no means solving the Sovereign Debt Crisis that is becoming a global issue. The greatest danger here is still the failure to directly address the Sovereign Debt Crisis. This can easily be seen as a failure of the entire system. Once again, there is no substance and this is a dangerous coordinated multi-nation move that only confirms the deepening crisis faced by the global economy as a whole.

One way to gauge support for the price of oil is to calculate the breakeven price. In other words, what is the dollar amount per barrel that would be required for an oil-producing country to balance its fiscal budget?

Several factors go into this calculation such as the location (and quality) of a country’s reserves, and the spending habits of the federal government.

Analysts at Carnegie Investment Bank recently put together this chart, which illustrates the breakeven price needed for some of the world’s largest oil producers. Combined, these countries are expected to produce 30 percent of the world’s oil in 2011, Carnegie says. Note: these prices are for Brent crude, which have been $10-to-$15 per barrel above West Texas Intermediate prices this year.

Russia, which is currently the world’s largest oil producer, has leaned on the profits of the natural gas and crude oil exports to account for nearly 14 percent of the country’s GDP in 2010. But Russia isn’t the only export-dependent country. Many countries in the Middle East, such as Saudi Arabia and Iran, have used oil profits to ease “Arab Spring” tensions by financing public programs.

However, Carnegie notes that the fiscal budgets of many oil-exporting countries were rising prior to the citizen revolution due to a lack of non-oil revenues, rapid population growth and generous welfare systems. For example, Saudi Arabia, which generates 80 percent of its government revenue from the petroleum sector, has increased government spending roughly 54 percent since 2008. Other countries such as the UAE (up 48 percent), Bahrain (up 53 percent) and Qatar (up 59 percent) have seen government spending increase over the same time period.

Carnegie says the result is, “OPEC countries have stronger incentives to defend higher oil prices, i.e. any drop in the oil price could mean lower OPEC production in order to try to secure higher oil prices.” It also means these countries are “less likely to invest in building additional production capacity.”

This only adds to our argument that we could see oil prices continue at their current levels despite a weaker global economy and softening demand for oil.

It seems like it was only yesterday that we celebrated 15,OOO,OOO,OOO,OOOBAMA day. Two weeks later, we are now well over 100 billion in debt over this historic landmark, or $15.11 trillion to be precise, following the predicted $55 billion increase in debt with the settlement of all auctions from last week. And aside from the mind-staggering rate of new debt increase why else is this number notable? Because as we learned 10 days ago, total Q3 GDP in current dollars is $15.18 trillion. In other words, US debt/GDP is now 99.5%, the highest it has been in the post WW2 period, and rapidly rising. What is worse is that the delta to 100% debt/GDP is only $70 billion: this is about half of the next two weekly gross issuances of 3,10,30s and 2,5,7s of about $160 billion over the next two weeks. In other words by the end of 2011, debt/GDP will finally be a triple digit number percentage. And the other notable thing is that the debt limit still is $15.194 trillion. It is ironic that the economic growth ceiling and the debt issuance ceiling are now one and the same: if the the debt target number does not rise neither will the US economy. Q.E.D.

Oil, natural gas, chemicals and metals have all hit hot streaks in the past year. Economic fears, world conflicts, consumer habits and better technology have all impacted the price of these products.

This will not only be the case in the coming year, but for the rest of our lives. And when you factor in runaway inflation pushing up the price of crude oil and silver and other commodity prices, you can understand why these stocks are a good buy.

Make sure you own at least a few shares of each of these commodity companies because they are your best bets in profiting from these emerging trends:

CF Industries Holding Inc. (NYSE:CF) manufactures and markets nitrogen and phosphate-based fertilizers, which are critical for agricultural and industrial customers around the world. Because of high crop prices, the underlying fundamentals for CF Industries remains outstanding, and I would not be surprised if the company eventually is acquired by a big mining company — like the one that went after Potash (NYSE:POT) — because of its low price-to-earnings ratio, strong cash flow, sales and earnings growth.

EQT Corp. (NYSE:EQT) is one of the nation’s largest natural gas producers. There are three things that I love about this company: its 120-year history, its fully integrated supply chain and its impressive infrastructure. In the third quarter, production sales volumes shot up 51% compared with Q3 2010. This, in addition to increased midstream volumes, contributed to a 32% boost in total sales, which grew from $248.5 million last year to $328.5 million this year. This kind of consistent growth is excellent news for the company and for your profit potential.

Marathon Oil Corp. (NYSE:MRO) is coming off what sports teams would call a “rebuilding year.” The company smartly spun off its refining and marketing business — Marathon Petroleum Corp. (NYSE:MPC) — this past June. The separation of the two companies allowed MRO to focus on being an independent oil exploration and production company. However, the timing could have been better. The company split just as oil prices began to get very erratic, and it was impossible for analysts to get a handle on MRO earnings. I fully expect that this will work itself out in the quarters to come and that MRO will prove to be a very profitable energy play in 2012.

Silver Wheaton Corp. (NYSE:SLW) is experiencing steady sales and earnings growth thanks to high silver prices. The company is a “zigzag” stock in my portfolio because it acts as a hedge whenever silver and other commodity prices soar on bad economic news, such as all the fiscal problems in the euro zone. Plus, the analyst community is having a hard time estimating the company’s long-term contract for silver, but Silver Wheaton’s stunning sales and earnings are simply overpowering!

CPFL Energia S.A. (NYSE:CPL) is a major electricity provider in Brazil. CPFL distributes electricity to approximately 6.4 million customers. Brazil is one of the fastest-growing economies right now and, as it produces more, it is consuming more energy. This is great news for energy-sector plays like CPFL. The sector is known for mergers and acquisitions, so any rumors in this area would boost shares.

We all know options can be a great way to generate income, as I’ve written about before. We also know options can be a useful tool to hedge your long stock positions. There’s another great play that uses options that I reserve for very speculative situations, including one that I’m facing right now. That’s when I like to use LEAPS (or, longer-term options).

One of the tricks with options is that you may make a correct call on a stock price’s movement, but have the time frame wrong. By using a longer-term option (through which you can get up to an additional two years’ worth of time with your position), you can protect against that mistake.

Of course, since options are priced according to time frame, it means this alternative will be more costly. That’s why I only go for it in highly speculative situations where my risk in using just a straight stock purchase or shorting is unlimited. With LEAPS, I can easily limit that risk.

The best way to illustrate the use of LEAPS is to use a real example — a situation that is in play right now. It involves Netflix (NASDAQ:NFLX).

There’s been a lot of speculation as to whether Netflix is going to survive and thrive … or struggle but survive … or die quickly … or even die slowly.

The easy money has been made — if you shorted when the stock was in the $200s or even the $100s, you’ve done well. But how do we play it from here?

My own opinion is that Netflix is going to go bankrupt, and it is likely to happen in the next two years. The problem is that, in the interim, the stock may jump from the $60s, where it is now, to over $100. Who knows?

I could short it and set a stop-loss, but if the stock should gap up on the open, it’ll blow through my stop-loss.

I want a situation where I don’t have to risk as much as I might shorting the stock, but which bets on a complete implosion. So far, Netflix has shown a tendency to drop by double-digits on days with bad news. I think that’s going to continue.

So, I’m looking at buying the NFLX January (2013) 65 Puts, which are selling for $20 per share, or about $2,000 per contract. That means if Netflix craters to $45 by then, I will break even.

In fact, if it does so before January 2013, I may even be able to sell it for more than $20, given the time value of the option that remains. And if NFLX should totally implode and go to zero, the put will be worth $65, and I will more than triple my money.

That’s one way to play it. But an even-better choice is the January (2014) 65 Puts, which are selling for about $25. With the 2014 expiration, I get an extra year on my option for only $500 more.

I break even if the stock hits $40 on expiration, and maybe make something if it does so before expiration. Once again, if the stock goes to zero, I will make $65 for the contract, and more than double my money.

You can, of course, buy calls that are way out-of-the-money (that is, with strike prices that are higher than the market price of the shares) on stocks you think might go much, much higher without risking the capital to buy the stock. Again, though, save these LEAPS for very speculative situations.

I think you will admit that we are in the middle of one major crazy financial mess. The part that makes things really crazy is that it’s not just in the United States anymore but rather serious global problem which if not handled properly could change the way we live our lives going forward or possibly even spark some type of war, hopefully things don’t get that crazy… But I do know one thing. Fear is the most powerful force on the planet and people do some crazy things when they are backed into a corner.

Anyways, on a more positive tone… today China decided to help provide more liquidity for the financial system along with the central banks. This news triggered a monster rally in overnight trading making the market gap up sharply at the opening bell. This news did hit the US dollar index hard sending it sharply lower but the question remains “Will today’s news be a one week hiccup in the market?” If Euroland starts printing money it will likely send the dollar higher and stocks lower for 6- 12 months.

Just today I was joking with Kerry Lutz of the Financial Survivor Network about how each country should just give each other country a second chance. Wipe the dept clean and start over knowing this time around exactly how each country truly operates at a financial level allowing everyone to avoid a repeat of this BS. Some countries will get off way better than others because they would get so much dept wiped clean but isn’t it better than years of problems and possibly wars over food, gold, guns, oil and Canadian water? – EH

I’m sure my off the cuff options/thoughts will cause a stir but I am fine with that. Everyone I talk to is thinking the dollar is about to fall off a cliff while I think it’s very possible that it does just the opposite. Either way I will be looking to benefit from which ever move unfolds.

Weekly Gold Chart:

Weekly Silver Chart:

Weekly SP500 Chart:

Long Term Thoughts:

I would first like to say that tonight’s report is out of my norm. Generally I do not focus on the big picture negative stuff and I like to avoid it for a few reasons… One, it’s just downright depressing to talk and think about. And Second I don’t want to be labelled as one of those “The Sky Is Falling” kinds of guys.

So, that being said I think these charts above show a situation what is very possible to happen in the coming 6-12 months. Keep in mind that my focus is on short term time frames as it allows me to avoid and actually profit from major market moves while providing enough information for my followers to learn technical analysis and trade management. And the obvious idea of not looking too far into the future with a negative outlook…

With headline risk changing the market direction on a weekly basis, this negative outlook could easily change in a couple months. I will recap on the big picture as things unfold in January/February.

From the other day, Yale Economist Robert Shiller talks about the latest S&P Case Shiller Home Price Index that showed property values are again falling sharply and he notes that there’s no reason to think they’ll go up anytime soon.

They say that market bottoms are made when everyone’s lost interest and that could time could soon be approaching for housing here in the U.S.